U.S. Promlite Tech., Inc. v. Am. First Nat'l Bank (In re U.S. Promlite Tech. Inc.)

636 B.R. 743

IN RE: USA PROMLITE TECHNOLOGY INC, Debtor.

USA Promlite Technology, Inc., Plaintiff,

v.American First National Bank and City of Hildalgo and Texas Enviro-Lite, Defendants.

CASE NO: 18-36893

ADVERSARY NO. 19-3331

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed January 11, 2022

Nelson M. ones, III, Law Office of Nelson M. Jones III, Houston, TX, for Plaintiff.

Erick Gustavo Holguin, Dennis A. Longoria, Ellis, Koeneke & Ramirez, LLP, McAllen, TX, for Defendant City of Hildalgo.

Tuananh Lam Mai, Mai & Na PLLC, Houston, TX, for Defendant American First National Bank.

Timothy L. Wentworth, Okin Adams, LLP, Houston, TX, for Trustee.

MEMORANDUM OPINION

Eduardo Rodriguez, United States Bankruptcy Judge

On remand from the United States District Court, and in light of subsequent intervening case law, this Court must decide whether the City of Hidalgo waived its immunity to suit. Additionally, the Court will consider the previously unaddressed issue of whether dismissal should be granted on the grounds that the November 20, 2013 Energy Management Contract is unenforceable and unconstitutional under Article XI sections 5 and 7 of the Texas Constitution. For the reasons stated herein, the Court denies the City of Hidalgo's motion to dismiss on both grounds.

I. BACKGROUND

The City of Hidalgo ("Defendant ") is a home-rule municipality in the Rio Grande Valley.¹ In 2013, Defendant entered into a contract with U.S.A. Promlite Technology, Inc. ("Promlite ") for the retrofitting and installation of LED lights in all city buildings, streets lamps, parking lots, and the State Farm Arena (now known as the Payne Arena) and other government-owned spaces.² Disputes over the contract arose and Promlite sued Defendant in the Hidalgo County State District Court for breach of contract and asserted quasi-contractual equitable claims for unjust enrichment and quantum meruit.³

American First National Bank ("AFNB " and together with Promlite, "Plaintiffs ") filed a Petition in Intervention claiming that it received an assignment from Promlite as to the breach of contract claim against the City.⁴ This was purportedly part of the loan agreement between AFNB and Promlite.⁵ The State District Court granted summary judgment against AFNB's intervention claim.⁶ Subsequently, Promlite filed for bankruptcy on December 6, 2018.⁷ Promlite then filed a Notice of Removal of the state court action against Defendant⁸ and later, AFNB filed a Motion for Reconsideration of the State Court's Order Granting Summary Judgment.⁹ After a hearing, this Court reconsidered the state court summary judgment order and allowed AFNB to proceed under a "partial assignment."¹⁰

In its Original Complaint ("Complaint "), Promlite pled the following causes of action: (i) breach of contract; (ii) unjust enrichment; and (iii) quantum meruit.¹¹ Seeking dismissal of all three claims, Defendant filed its Plea to the Jurisdiction, Motion to Dismiss for Lack of Subject Matter Jurisdiction, Motion to Dismiss Pursuant to Rule 12(b) and Dismiss Pursuant to the City of Hidalgo's Governmental Immunity ("Motion to Dismiss " or "Motion ").¹² In response, Promlite and AFNB filed their Joint Response to Defendant's Motion to Dismiss ("Joint Response ").¹³ A hearing on the Motion to Dismiss was held on November 16, 2020.¹⁴ On December 9, 2020, this Court entered its Memorandum Opinion and Order granting Defendant's Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(1) on the grounds that suit against Defendant was barred by governmental immunity.¹⁵

On December 17, 2020, Plaintiffs filed a joint appeal to the United States District Court.¹⁶ On July 29, 2021, the District Court issued its Memorandum Opinion and held that while Promlite and AFNB's appeal of this Court's Order and Memorandum Opinion at ECF Nos. 77 and 78 was pending, the Fifth Circuit concluded that Texas Local Government Code § 271.156 does not bar suits against a municipality in federal courts, because such an entity "cannot condition its waiver of immunity on a suit being brought in any forum other than a federal forum."¹⁷ The Fifth Circuit stated that, "in the absence of constitutional sovereign immunity, a governmental entity cannot bar a federal court from exercising jurisdiction over claims that state courts would recognize and enforce," and that "[f]ederal jurisdiction cannot be defeated by a state statute limiting the forum in which the action must be brought."¹⁸

On August 17, 2021, the Court held a status conference and ordered briefing.¹⁹ On August 30, 2021, Plaintiffs filed an amended complaint ("Amended Complaint ")²⁰ where the only remaining cause of action is a breach of contract claim alleged against Defendant. Plaintiffs also filed a joint brief addressing remaining issues on September 14, 2021 ("Plaintiffs’ Brief ").²¹ On September 28, 2021, Defendant filed its brief ("Defendant's Brief "),²² and pursuant to the Court's October 27, 2021 Order,²³ Plaintiffs filed their brief in reply to Defendant's Brief ("Plaintiffs’ Reply Brief ") on November 11, 2021 addressing new issues raised in Defendant's Brief. On December 20, 2021, a hearing was held addressing the remaining issues.²⁴ The matter is now ripe for determination.

II. ANALYSIS

A. Jurisdiction to Consider the City of Hidalgo's Motion to Dismiss

1. Arising In and Arising Under Jurisdiction

This Court lacks both arising in and arising under jurisdiction because Plaintiffs’ remaining cause of action for breach of contract is neither created or determined by title 11 nor does it arise only in bankruptcy.²⁵ Under 28 U.S.C. § 157(a), "[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11 ...."²⁶ For jurisdiction to "arise under" title 11, the cause of action asserted by the plaintiff must be either created or determined by title 11.²⁷ "Arising under" jurisdiction requires that the proceeding "invoke a substantive right provided by [the Bankruptcy Code]."²⁸ "Arising in" jurisdiction requires that the proceeding "would have no existence outside of the bankruptcy," where the asserted causes of action are not based on any provision of the Bankruptcy Code.²⁹

Plaintiffs’ remaining cause of action in this case does not arise under or arise in title 11.³⁰ Plaintiffs’ claim for breach of contract was initiated in state court³¹ and arises under the Texas Business and Commerce Code.³² Plaintiffs do not argue that their breach of contract claim is based on substantive rights provided by the Bankruptcy Code and this Court does not find any such rights relevant to this proceeding. Additionally, this case landed in this Court only because Promlite filed a Notice of Removal based on its underlying bankruptcy case.³³ If not for Promlite's bankruptcy, the claim asserted could have been adjudicated on the merits in the state court.³⁴ Lacking "arising under" or "arising in" jurisdiction, the Court turns to whether it has "related to" jurisdiction pursuant to 28 U.S.C. § 1334(b).

2. Related to Jurisdiction

This Court has related to jurisdiction over this matter pursuant to 28 U.S.C. § 157(c)(1), which provides "[a] bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11." A proceeding is "related to" a case under title 11 "when the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy."³⁵ In other words, "if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate."³⁶ Here, Promlite is the debtor in the underlying Chapter 7 bankruptcy case.³⁷ The outcome of this adversary proceeding could conceivably impact the administration of Promlite's bankruptcy case because if it prevails in the instant suit and is awarded any of the damages it seeks,³⁸ that money will become property of the estate pursuant to 11 U.S.C. § 541(a) and be subject to the $1,817,377.73 in liabilities Promlite disclosed on its latest schedules.³⁹ Any money potentially won in a lawsuit such as this one conceivably would have an effect on administration of the bankruptcy estate.⁴⁰

B. Authority to Enter a Final Order

Defendant's Motion to Dismiss requests that this Court dismiss Plaintiffs’ cause of action pursuant to, inter alia, Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Federal Rule 12 applies to this adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 7012. Rule 12(h)(3) mandates that "[i]f the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action."⁴¹ Because "[i]t is incumbent on all federal courts to dismiss an action whenever it appears that subject matter jurisdiction is lacking," this Court must enter an order dismissing this suit if it finds its lacks jurisdiction to adjudicate Plaintiffs’ remaining claim.⁴² However, should the Honorable United States District Court find that the Bankruptcy Court did not have authority to enter a final order, this Court requests that the District Court convert this Memorandum Opinion into a Report and Recommendation.

C. Defendant's Motion to Dismiss

The Court considers two narrow issues: (1) whether Defendant waived its immunity to suit; and (2) whether dismissal should be granted on the grounds that the November 20, 2013 Energy Management Contract ("Contract ") is unenforceable and unconstitutional under the Texas Constitution Article XI sections 5 and 7. First, in its Motion, Defendant argues that it is entitled to governmental immunity and that immunity has not been waived.⁴³ Thus, Defendant concludes, this Court must dismiss the Amended Complaint pursuant to Federal Rule of Civil Procedure 12(b)(1).⁴⁴ Next, Defendant argues that if this Court does not dismiss the Amended Complaint...